Question

Video Streaming Services obtain content distribution rights in order to stream TV shows and movies on subscribers' TVs, computers and mobile devices. Streaming content is generally licensed for a fixed fee for the term of the license agreement. How do you think these firms should recognize the amounts they pay upfront for these licenses?

Answer 1

Streaming content accounting standards.We use two accounting standards for our streaming content costs. Since we launched streaming in 2007, we have used the guidance of ASC 920: Entertainment - Broadcasting because we started the streaming service with content that we license (rather than own). ●We license both Netflix originals (such as House of Cards and Orange is the New Black) as well as 2nd run titles, such as Shameless and How to Get Away with MurderBeginning in 2016, we also now apply the guidance of ASC 926: Entertainment - Films for the original content that we self-produce and where we own the intellectual property.●We believe the benefits of self-producing content include lower costs (no studio middle-man), ownership of the intellectual property, which allows us to potentially monetize in different ways (eg, licensing & merchandising) and greater rights flexibility (global rights, exclusivity)

Amortization methodology.

●The amortization schedule for content is based on historical and estimated viewing patterns and is reviewed quarterly

●Our content library is amortized on an accelerated basis

●Content assets are amortized over the shorter of the title’s window of availability or estimated period of use or 10 years

●On average, over 90% of a licensed or produced streaming content asset is expected to be amortized within four years after its month of first availability.

●First run topical programming like talk shows are expensed upon airing

We use ASC 926 for produced assets.For content that we produce, we capitalize the costs associated with production, including development cost, direct costs and production overhead. These amounts are included in "Non-current content library, net" in our balance sheet.

Content accounting in our financials.

Balance sheet

●Total cost of titles is recorded as assets in the content library

●Total unpaid cost of titles is recorded as a liability

Income statement

●The asset is amortized over the shorter of the title’s window of availability or useful life

●Amortization expense is recorded in cost of revenue

Cash Flow Statement

●Additions to streaming content library = total gross additions (not cash paid)

●Change in streaming content liabilities = net change in liabilities resulting from payments and library additions, both current and non-current

●Amortization of content library = adjusts for the non-cash expense included in net income